Abolish the corporate income tax: Laurence J. Kotlikoff

What can workers do to mitigate their plight? One useful step would be to lobby to eliminate the corporate income tax.

By Laurence J. Kotlikoff

BOSTON - Jobs don't grow out of thin air, especially
well-paying ones. They require, among other things, companies that are willing
to operate where you live. Just ask the Seattle-based
District 751 of the machinists' union, which is worried
that Boeing will build its new 777X airliner someplace far away where it is
cheaper to produce. Last month the union offered contract concessions, as its
president explained, to ensure "the long-term success" of Boeing in Washington state. But whether Boeing will stay remains
in doubt.

In recent decades, American workers have
suffered one body blow after another: the decline in manufacturing, foreign
competition, outsourcing, the Great Recession and smart machines that replace
people everywhere you look. Amazon and Google are now in a horse race to see
how many humans they can put out of work with self-guided delivery drones and
driverless cars. You wonder who will be left with incomes to buy what these
robots deliver.

What can workers do to mitigate their plight?
One useful step would be to lobby to eliminate the corporate income tax.

That might sound like a giveaway to the rich.
It's not. The rich, including Boeing's stockholders, can take their companies
and run - and not just from Washington state to,
say, North Carolina. To avoid our federal
corporate tax, they can, and often do, move their operations and jobs abroad.
Apple's tax return says it all: The company, according to one calculation, paid
only 8.2 percent of its worldwide profits in U.S. corporate income taxes,
thanks to piling up most of its profits and locating far too many of its
operations overseas.

I, like many economists, suspect that our
corporate income tax is economically self-defeating - hurting workers, not
capitalists, and collecting precious little revenue to boot.

The United States may well have the highest effective marginal
corporate income tax rate of any developed country. Jack
Mintz, a public finance economist and director of the School of Public Policy at the University
of Calgary, puts the rate close to 35 percent, which is also the
statutory rate. Other economists, using different techniques, calculate the
marginal rate to be as low as 23 percent. But both figures are miles above
zero.

They are also miles above our 13 percent
average corporate income tax rate - the ratio of corporate taxes to total
corporate profits. The fact that the marginal tax rate, whether 23 percent, 35
percent or somewhere in between, is so much larger than the average rate
suggests that a sizable share of corporate profits and production is ending up
overseas and untaxed.

Making, rather than just stating, this case
requires constructing a large-scale computer simulation model of the U.S.
economy as it interacts over time with the economies of other countries, and
then seeing how the model reacts when you change the U.S. corporate income tax.
I've developed such a model with three colleagues through the Tax Analysis
Center, a nonpartisan research group. Our findings make a very strong,
worker-based case for corporate tax reform.

In the model, eliminating the U.S. corporate
income tax produces rapid and dramatic increases in American investment, output
and real wages, making the tax cut self-financing to a significant extent.
Somewhat smaller gains arise from revenue-neutral corporate tax base
broadening, specifically cutting the corporate tax rate to 9 percent and
eliminating all corporate tax loopholes. Both policies generate welfare gains
for all generations in the United States, but
particularly for young and future workers. Moreover, all Americans can benefit,
though by less, if foreign countries also cut their corporate tax rates.

The size of the potential economic and
welfare gains are stunningly large and don't reflect any extreme supply-side
(aka voodoo economics) assumptions. Fully eliminating the corporate income tax
and replacing any loss in revenues with somewhat higher personal income tax
rates leads to a huge short-run inflow of capital, raising U.S. capital stock
(machines and buildings) by 23 percent, output by 8 percent and the real wages
of unskilled and skilled workers by 12 percent. Lowering the corporate rate tax
to 9 percent while also closing loopholes is roughly revenue neutral and also
produces very rapid increases in capital (by 17 percent), output (by 6 percent)
and real wages (by 8 percent).

Eliminating the corporate tax and raising
income tax rates or lowering the corporate tax rate and eliminating its loopholes
are not the only options to consider. Elsewhere, I have proposed eliminating
the corporate income tax, but making corporate shareholders pay income taxes on
their companies' profits as they accrue. This leaves corporations with no tax
reason to avoid operating in the United States,
but ensures that shareholders, not wage earners, make up for any revenue losses
through higher personal tax payments.

It's been a long time since the typical
American worker received a raise in her real pay. In fact, average weekly
earnings, exclusive of fringe benefits but adjusted for inflation, are 10
percent lower today than they were in 1966. This is America's nightmare, not
its dream. Turning things around requires getting a lot of things right,
starting, I'd argue, with corporate tax reform.

Laurence
J. Kotlikoff, a professor of economics at Boston University, wrote this piece
for The New York Times.